In the recent period, the biggest moments in our economic policy-making have been those that have witnessed conflicting attitudes between Ministry of Finance and the central bank. The fact that conflicts arise is a testimony of the independence of mind in two of the key policy making centres of the country. It is a healthy condition. It shows that a mechanism of checks and balances is operating at that level. The question that remains posed is whether interest rate and exchange rate setting should be the determining factor in charting the future course of the economy. There is much more that goes in policy-making in the case of a dynamically adjusting economy, adjusting to internal structural factors but also to an external world which is undergoing vast change.
The Ministry is caught up typically in the argument of certain heads of enterprise. The latter are usually unhappy with the exchange rate of the rupee. If it firms up a bit or remains un-depreciated, they make it appear as if all the solid ground under their feet is slipping away. This kind of attitude is characteristic of a type of production which is too sensitive to marginal changes with little staying power. It also means that the industry has not employed those days when the going was good or even excellent as regards the depreciating currency to build up the necessary power of resilience by recapitalizing, eking out better productivity, going after the latest in technology, etc. The message that this situation is sending out to policy-makers is that we should now target setting up industries here that have a greater capacity to absorb shocks.
On the other side, the central bank is concerned that successively falling interest rates coupled with a rate of inflation which refuses to go down, is eating away into the purchasing power of the public. The mission entrusted to the central bank is to maintain confidence in the local currency domestically and internationally by not allowing its purchasing power to be eroded. It has been a difficult mission. Almost impossible.
In the decade of our independence, 100 grams of bread were purchased for less than 10 cents of our rupee. Today you need at least 250 cents to buy up that amount of bread. The same goes for scores of staple items of consumption. If the erosion of purchasing power is accompanied by adequate compensation in favour of the mass of the population, the central bank need not worry too much. In Mauritius, however, the private sector wants the erosion to continue while resisting fiercely any suggestion of wage compensation. The Gini coefficient has been showing a movement towards inequality of incomes in favour of the larger earners. If the central bank allows the rupee to depreciate on top of that, it will be adding insult to injury as the pass-through effect of exchange rate depreciation through higher import costs gets relayed to the public by escalating prices.
The best the central bank can do is to make gradual short-term adjustments to favour the growth of the economy, even if that meant new industry players, who are less vulnerable than the existing set of producers, coming on the stage to widen our economic scope. It cannot go on cautioning a policy of successive straight-line reduction of the interest rate and continuous depreciation of the rupee. It needs to examine together with stakeholders the monetary conditions that will serve to enlarge the number of industry players we have as well as steps that may be taken to admit in the country new industrial activities which will keep us off the usual litany of demands made by our existing producers from both the Ministry of Finance and the central bank.
All this is pointing out to making policy decisions which will help supersede the limitations being imposed by our existing production structure. It may involve joining hands with international successful operators who can employ our labour and other resources cost advantageously, producing for global markets. It will, as a matter of course, involve fast decision-making by political and industry leaders to give life to those more resilient new lines of activities. It will call for coordination at the level not only of the Ministry of Finance and the central bank. It will also require all the other concerned ministries looking after our material and skill resources to start working by formulating profitable future lines of business the country could sustainably undertake and state how they will set out to support such emergent activities and for how long.
Going in this direction will shift the focus away from the now repetitive positioning of the so far conflicting stands taken by the Ministry of Finance and the central bank. Countries move up the curve to create new additional production space. Their existing lines of production resist to the extent possible, at the same time, falling market demand or greater competition on markets. This means there should be a constant quest not by governments alone but by industry as well to “invent” demand for their products if need be. The perfume industry is constantly doing exactly this; new brands keep multiplying as demand is aroused. Sugar producers are employing the sugar in pastries, cookies, chocolates, etc., to get their production going if the sugar itself faces up with resistance.
There are smart countries. There are countries which are not so smart in the world. The smart countries are those which keep refreshing their production activities and importing new scope into their production. This is done by following up closely what all is happening on the global markets and how we should trim ourselves up in time to be well paced to go to meet the demand arising from it even before others are at it. We need to be forward looking. This is an element in which we have had serious deficit for a number of years. While the economy can go on performing on automatic pilot for some time, you need to tweak it up from time to time if you are alive to changes shifting patterns of demand and cutting down the competitiveness of what you are producing already.
Mauritius needs to establish its vision and make it happen rather than jump on from one project to another on an ad hoc basis without a comprehensive plan as to where we are going and the means we are putting at our disposal to achieve higher goals. As Lord Desai stated in an interview to this paper: we need to be running all the time if we want our economy to make it. This is the basic pre-condition for a small island economy to succeed in the fiercely competitive environment. Nothing short of thinking out the beyond and actually implementing it can do this work for us.
* Published in print edition on 22 March 2013